Norway faces liquidity shock in record redemption

The government is preparing to repay a record 66.5 billion kroner ($11.8 billion) in 6.5% bonds maturing May 15, which is more than the top-rated nation has left to sell of its planned 70 billion kroner in issuance this year.

The redemption threatens to trigger an outflow of funds as foreign investors balk at the loss of liquidity, driving up existing debt prices and weakening the krone, according to analysts at Nordea Bank AB and Danske Bank A/S. Offshore investors own almost 60% of the maturing bonds, or about 38 billion kroner, Nordea estimates.

“The amount involved means that this flow could have a substantial market impact,” said Gaute Langeland, chief analyst at Nordea Markets in Oslo.

Norway, which boasts the biggest budget surplus of any AAA rated nation and has no net debt, emerged last year as a haven from the euro area’s debt crisis. Demand for assets perceived as safe from Europe’s debt crisis returned this week after an inconclusive election in Italy fueled speculation the nation may backtrack on austerity measures.

Norway’s 10-year yields slid seven basis points yesterday and a further four basis points today to 2.40%. The yield had jumped from a low of about 1.61% in July last year and about 2.14% at the start of the year. The yield on Norway’s 2015 note has rallied to about 1.51%, down from a high of 1.78% last month.

Cash Repatriation

Norwegian government debt has the lowest credit default swap spread of any developed nation, according to data compiled by Bloomberg. Five-year default swaps traded at 19 basis points today. Default swaps on U.S. debt traded at 43 basis points yesterday, while it cost 40 basis points to insure against a German default.

Still, Norwegian bonds have lost 0.7% this year after European Central Bank President Mario Draghi’s July pledge to do whatever it takes to keep the currency bloc intact. That contrasts with Norway’s central bank, which has signaled it’s prepared to raise rates as soon as next month to cool an expansion even as policy makers in Sweden, the U.S. and the rest of Europe have pledged extended periods of low borrowing costs.

“We suspect that quite a few international investors will choose to repatriate their investments,” said Bernt Christian Brun, chief analyst at Danske Bank in Oslo. A relatively heavy issuance of Norwegian bonds in recent months has led to increased yields and widening spreads compared with German bunds, particularly on longer Norwegian bonds, Brun said.